Weak crude prices push down sector’s bonds; Freeport-McMoran continues rebound; Cliffs’ debt fades

By Stephanie N. Rotondo

Seattle, Feb. 1 – The distressed debt space was weaker Monday, as weak manufacturing data and a renewed decline in crude oil pressured the markets.

A new report showed that manufacturing in China contracted at the highest rate in the last four years. That news, combined with reports that any production cuts among OPEC and non-OPEC oil producers would likely not come soon, pushed crude oil prices down nearly 6.5%.

In turn, oil and gas-linked securities were waning.

Whiting Petroleum Corp.’s 6¼% notes due 2023 fell almost a point to 61½, according to a trader. Oasis Petroleum Inc.’s 6 7/8% notes due 2022 were meantime off over a point at 58¾.

SandRidge Energy Inc. paper, however, bucked the day’s trend.

A trader said the 7½% notes due 2023 inched up a shade to “1 and change,” while the 8 1/8% notes due 2022 were up a like amount at 1 5/8.

The trader also saw the 8¾% second-lien notes due 2020 rising 1½ points to 25.

At another desk, a trader said the second-liens inched up to “around 20½,” from levels around 19 previously.

Last week, the Oklahoma City-based oil and gas producer said it was exploring its restructuring options.

Among oil and gas preferreds, Breitburn Energy Partners LP’s 8.25% series A cumulative redeemable perpetual preferred units (Nasdaq: BBEPP) fell $1.16, or 15.61%, $6.27. Vanguard Natural Resources LLC’s 7.625% series B cumulative redeemable preferred units (Nasdaq: VNRBP) meantime dropped $1.13, or 18.9%, to $4.85.

While the oil and gas arena was certainly weaker, investors remained focused on Freeport-McMoran Inc.’s debt. The paper began falling last week in the wake of disappointing quarterly results and a significant rating downgrade. However, the bonds began to rebound toward the end of the week – a trend that continued into Monday trading, albeit with no further news to prompt the move.

Meanwhile, Cliffs Natural Resources Inc. was on the decline, as investors continue to digest earnings from last week, as well as a new exchange offer.

Freeport has momentum

Freeport-McMoran bonds continued to dominate the high-yield landscape, traders reported Monday.

“They were active again, no question,” a trader said. “Relatively speaking, they seemed a smidge better than Friday, from what I see.”

The trader said the longer dated issues, such as the 3 7/8% notes due 2023, were trading in a 41 to 42 context. The 4.55% notes due 2024 were seen “straddling” 43.

As for the 2 3/8% notes due 2018, those were in a range of 64½ to 65, the trader said, up from a range of 63 to 64½ on Friday.

Another trader placed the 2023 bonds at 42½, up over a point on the day. The 4.55% notes were deemed a point higher at 42½.

The 2 3/8% notes were called 1½ points better at 65.

On Wednesday, Moody’s cut its senior unsecured ratings on Freeport to Ba from Baa3. The rating agency noted that the change was due to concerns about the company’s level of debt protection, especially considering the decline of copper prices in the last year.

“While Moody’s downgrade [of Freeport bonds] to below investment grade shouldn’t come as a surprise, the order of the magnitude was more than we had anticipated,” wrote Gimme Credit LLC analyst Evan Mann in an afternoon comment published Thursday. Mann noted that the revision took the rating down four notches and that the outlook remained negative – meaning more downgrades could come in the near-term.

Moody’s rating alteration came on the heels of Freeport’s quarterly results, which were announced Tuesday. For the quarter, net loss was $4.1 billion, or $3.47 per share. For the fiscal year, net loss came to $12.2 billion, or $11.31 per share.

Operating cash flows for the quarter were $612 million and $3.2 billion for the full year.

Fourth-quarter capital expenditures totaled $1.3 billion and $6.35 billion for 2015. Capital expenditures are expected to be about $3.4 billion for 2016.

During a conference call to discuss the results, management said it was considering alternatives to asset sales, including the possibility of entering joint ventures. Furthermore, it had engaged Lazard to review the company’s oil and gas unit.

Cliffs’ debt declines

Cliffs Natural Resources was moving down on the day, following the company’s earnings release last week, which resulted in a credit downgrade from Standard & Poor’s.

A trader saw the 5.9% notes due 2020 sliding nearly 1½ points to 13½. He said the 4 7/8% notes due 2021 dipped half a point to 13.

Both issues are part of an exchange offer for six series of notes that the company launched after reporting earnings on Wednesday.

A second trader agreed that the bonds included in said exchange were trading in the mid-teens.

Year over year, Cliffs’ posted a narrower loss though sales dove 54% in the fourth quarter. Still, adjusted EBITDA was better than expected, due in large part to the company’s cost-cutting efforts.

The Cleveland-based iron and coal mining company hopes to further reduce its debt via its exchange offer. The old notes will be replaced with up to $710 million of new 8% 1.5-lien senior secured notes due 2020, indicating a steep discount to par value.

The discount varies depending upon which of the six issues is held.

If successful, the exchange offer would give Cliffs a bit of a reprieve its terms of cash outflows, according to Mann, the analyst with Gimme Credit.

“The reduction in cash outflows this year may buy more time to take advantage of low bond prices to reduce debt and give import tariffs a chance to take hold,” Mann said in a report published Monday morning. “But given the iron ore market continues to face strong headwinds, bankruptcy is a distinct possibility over the medium term.”

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